If AI’s progress is indeed stalling, what do we make of the hundreds of billions of dollars being spent on GPU laden data centers by the hyperscalers, the likes Microsoft, Meta, Amazon and Google. Here’s Harris Kupperman, the author of the insightful newsletter Kuppy’s Korner, doing the math for us. And it doesn’t look good even without an AI stalling scenario.
He reckons the AI capex spend for 2025 will likely be around $400bn with an average life of 10yrs for a datacenter: “…Which leads you to the first shocking revelation; the AI datacenters to be built in 2025 will suffer $40 billion of annual depreciation, while generating somewhere between $15 and $20 billion of revenue. The depreciation is literally twice what the revenue is.”
Whilst its hard to estimate likely gross margins he pegs it at 25% given “electricity is really expensive and you need a lot of expensive tech nerds to manage the equipment”
At this rate, “..you need $160 billion of revenue just to cover the depreciation”, against the current $15-20bn. And if were to make a 20% RoIC (lowly by the hyperscalers’ standards), you will need a revenue of $480bn. Then he makes a generous assessment of use cases:
“Now, I think AI grows. I think the use-cases grow. I think the revenue grows. I think they eventually charge more for products that I didn’t even know could exist. However, $480 billion is a LOT of revenue for guys like me who don’t even pay a monthly fee today for the product. To put this into perspective, Netflix had $39 billion in revenue in 2024 on roughly 300 million subscribers, or less than 10% of the required revenue, yet having rather fully tapped out the TAM of users who will pay a subscription for a product like this. Microsoft Office 365 got to $ 95 billion in commercial and consumer spending in 2024, and then even Microsoft ran out of people to sell the product to. $480 billion is just an astronomical number.”
But that’s just to cover a year’s worth of capex: “…$480 billion in revenue isn’t for all of the world’s future AI needs, it’s the revenue simply needed to cover the 2025 capex spend. What if they spend twice as much in 2026?? What if you need almost $1 trillion in revenue to cover the 2026 vintage of spend??”
Having shown us the absurdity of this math, he brings us back to the title of the piece:
“While we all remember Pets.Com and the hundreds of other Dot Com startups that flamed away, it was companies like Global Crossing, spending tens of billions on fiber, that facilitated all of this. That fiber, amazingly, is still in use. Global Crossing went bankrupt along the way, as did many of its peers. They overestimated what people would pay for this fiber, not that it would eventually be used or valuable.”
Till not too long ago, the phrase ‘capitalism without capital’ was being bandied about to refer to the asset light cash generative machines that Big Tech had become:
“Now you have megacap tech stocks that are spending almost all of their cash flow on datacenters for fear of missing out. These asset-light businesses suddenly have the capital intensity of a shale company. Even worse, since losing the AI race is potentially existential; all future cashflow, for years into the future, may also have to be funneled into datacenters with fabulously negative returns on capital. However, lighting hundreds of billions on fire may seem preferable than losing out to a competitor, despite not even knowing what the prize ultimately is.
… I’ve seen this story before—fiber in 2000, shale in 2014, cannabis in 2019. Each time, the technology or product was real, even transformative. But the capital cycle was brutal, the math unforgiving, and the equity holders were ultimately incinerated. AI will be no different. The datacenters will be built, the chips will hum, and some of the capacity will eventually prove mind-blowingly useful. But the investors footing the bill today will regret ever making the investment. That’s how bubbles end—not with a bang of innovation, but with the slow, grinding realization of negative returns, for years into the future. When shareholders finally wake up to the fact that AI isn’t generating cash flow, only burning it, the guillotine will fall—on management, on the stocks, and on the broader market that bet its future on a fantasy.”
The mentioned stocks Amazon, Alphabet (parent company of Google), Meta, and Microsoft are part of Marcellus’ Global Compounders Portfolio, a strategy offered by the IFSC branch of Marcellus Investment Managers Private Limited and regulated by IFSCA. Accordingly, Marcellus, its employees, immediate relatives, and clients may hold interests or positions in these stocks. Any references to these companies are made solely for informational and educational purposes, in the context of the article discussed.
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